by: Steve Gillman
It was a simple real estate formula. The ads ran in our
small-town newspaper for years before I realized exactly what was going
on. They were always the same: A house for sale with 5% down and payments
of 1% of the purchase price. Maybe a three bedroom home for $90,000, for
example, with $4,500 down and $900 per month payments.
When a friend started doing the same thing he explained
the process to me. It was a way to get a great return on capital, and it
was the opposite of buying with no money down. There is no down payment at
all when you buy, because you buy for cash.
The Simple Real Estate Formula
You probably know that when you buy for cash, you can
often get a much better price. With no financing contingencies in the
offer, and the promise of a faster closing, sellers are willing to sell
for less. You can offer $95,000, for example, on a house that might be
worth $108,000. If you can't get it for less than, say, $99,000, you walk
away - there are always other opportunities.
Once you buy the house, you put few thousand into
high-return repairs and improvements. These might include paint, carpet,
and maybe asphalt for a dirt driveway. For our example, we'll say you
spend $5,000. Let's suppose the house is worth $116,000 now. You're ready
for the next important step in this real estate formula.
You put it up for sale, targeting buyers who can't get
financing easily. You provide the financing. Because you are making it
easy for the buyer, you can get more than the $116,000 value for the home
- and do it without paying a realtor's commission. Let's say you sell it
for 123,000. The buyer needs a down payment of just 5%, or $6,150, and
makes monthly payments of $1230 per month. You charge higher interest than
the going rates at the banks, of course.
This is a win-win situation. Your buyer is able to buy a
home instead of renting, and you get a capital gain of perhaps $16,000
after expenses, plus good interest. Your total rate of return will often
be over 20%!
In our town, the first to do this consistently were a
father and son team of lawyers. They saved money by doing their own
foreclosures when necessary. Once they foreclosed, they raised the price
and sold the home all over again.
They made millions. Did you know that if you can get an
average return of 18% on your money, you'll turn $75,000 into more than
one million dollars in about fifteen years? That's the power of a good
real estate formula.